Changing the law to allow foreign companies to establish themselves (or remain secret) costs next to nothing and has sparked a race to the bottom in corporate taxes that includes the United States. The only way out of this challenge is for countries to join forces to ban low-tax and tax havens while protecting the interests of low-income countries like those in Africa.

Companies can avoid taxes entirely and fully comply with the current international corporate tax system, which is based on “residence taxes,” whereby companies are taxed where they are legally resident, without regard to where they actually earn their income. Globalization makes it easy for companies to “live” in one place while earning money in another.

Countries are obsessed with attracting foreign investment and have used the establishment of foreign companies as a loophole. But foreign investors want expensive infrastructure such as good roads, high-speed internet, electricity and schools – and all of this depends on tax revenues.

Pillar One of the OECD’s two-pillar solution aims to redistribute some of the profits of multinational corporations to the countries where goods and services are sold, rather than to the company’s paper headquarters. For example, if a US corporation has a highly profitable subsidiary in Ireland that sells software to customers in Spain, Pillar One would allocate some of those Irish profits to the US and Spain so those governments can levy taxes on them.

Although 138 countries have joined the second pillar, its implementation is still patchy worldwide. There are significant administrative hurdles, especially in developing countries. Many African countries, for example, are struggling with hurdles in tax collection, and the pillars are no help in this regard.

Collecting taxes is the most difficult task for governments. Countries can only tax the people and businesses they can find. Illiteracy, barter economies, large areas of land without basic infrastructure such as electricity and roads, and extreme poverty make it difficult to find people and businesses.

Even if a government tracks down a person or company, it can still be difficult to determine their income and assets. This is why tax havens offer financial secrecy.

OECD data shows that African countries are more dependent than others on the taxes of large multinational corporations and suffer more when these companies hide their profits in tax havens.

Pillar Two is designed so that the country where a parent company is based can tax “foreign” subsidiaries if they are based in countries where tax rates are below 15%. African countries want the countries where their subsidiaries generate income to get the top-up, pointing out that while high-income countries lose most of their revenue to tax havens, low-income governments lose most of their revenue to tax havens.

Implementing Pillar 1 costs more than the new rules generate additional revenue. African countries use digital services taxes, which raise more revenue at lower costs. The Organisation for Economic Co-operation and Development (OECD) proposal only reaches 100 multinational companies, all based in high-income countries, and Pillar 1 requires member countries to eliminate all digital services taxes. Low-income countries risk losing tax revenue by switching from digital services taxes to Pillar 1.

Pillar One also only reaches companies with more than 10% profit, and Pillar Two sets a minimum corporate tax rate of 15%. African countries impose higher corporate tax rates than other countries and view these tax rates as part of a race to the bottom.

Beyond the issue of tax revenue, the entire OECD process has put African countries in a worse position than others. Pillars One and Two contain binding arbitration provisions. African countries fear that these arbitrators will come from a closed club of specialists who will consistently favor high-income governments.

The OECD’s Inclusive Framework is designed to enable interested countries and jurisdictions to work on the two-pillar solution on an equal footing with OECD and G20 members. One African tax official, Logan Wort, described a particular negotiation on the Inclusive Framework in which a document was sent after 10 p.m. with a deadline of the next morning: “If you get a deadline like that, you can sign away your taxation rights in your sleep.”

Why should African countries participate in a disrespectful process that creates rules that run counter to their economic interests? This is not about African countries bypassing Pillars One and Two because they want to become tax havens – it is about protecting public finances so they can serve their citizens. The West African Tax Administration Forum makes this clear by advising its members to make their decisions on Pillars One and Two solely on the basis of benefits versus costs to their citizens.

To address a problem as big as global taxation, nations must act in a concerted manner, which requires mutual respect and understanding. The United Nations African Group believes that the UN is a better forum for creating an international tax system. Low-income countries have more power and autonomy within the UN than in the OECD. A UN committee recently approved a draft tax agreement that reflects ongoing disagreements between developed and developing countries.

OECD countries should realise that they have created the international tax system that allows their multinational companies to avoid taxes. Perhaps it is time to share power and learn from the countries that are not part of the problem.

This article does not necessarily reflect the views of Bloomberg Industry Group, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Information about the author

US tax and development expert Beverly Moran is Professor Emeritus at Vanderbilt University, Senior Fellow at the Roosevelt Institute and Senior Tax Fellow at Boston College Law School.

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